Question

Assume that you were also asked to manage a portfolio of European stocks. How would your method for measuring your performance in managing this portfolio differ from the U.S. stock portfolio in the previous question?

Answer 1

We need to introduce following differences in the method of performance measurement:

1. Change the benchmark for performance measurement: The new benchmark should be the European stock market index. The performance of European stocks should now be compared and bench marked against the European stock market index.
2. Expected return on the portfolio has to be set based on the macro economic parameters of Europe. The portfolio beta has to be calculated using the correlation of the stocks returns with European market index.
3. The returns have to adjusted to reflect the risk profile of the European markets